Friday, September 4, 2009

Another Lesson on the Federal Reserve

Not a day goes by without talk of the Federal Reserve, whether by the organization itself or by its opponents. An incessant cheerleader of his organization, Chairman Ben Bernanke will be the first to tell you that the Federal Reserve is an utmost necessity to the smooth operation of the U.S. financial system. Some would disagree. And while ongoing events can be difficult to objectively examine, hindsight is usually much more prescient.

Let's set aside what The Fed says for a moment and examine what it actually does.

* From 1776 to 1912 (136 years), the value of the dollar, relative to the Consumer Price Index, increased by 11%. A dollar could buy 11% more goods in 1912 than in 1776. Thus, if in 1776, you sat on your savings pile of $1,000,000 for 136 years, it would then be worth $1,110,000 in purchasing power (it will have appreciated in value by 11%). A loaf of bread for Thomas Jefferson cost the same as a loaf of bread for Lincoln 50 years later and again the same for J.P. Morgan 50 years after that.

* The United States Federal Reserve System was created in 1913. The stated purpose of the Fed, by the definition taken from its own website, is to "conduct the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices." Note that "stable prices" is another way of saying "stable dollar," they are two sides of the same coin (couldn't resist the pun).

* After the Fed's creation, from 1913 to 2008 (95 years), the value of the dollar, relative to the Consumer Price Index, decreased by 95%. A dollar could buy 95% fewer goods in 2008 than in 1913. Thus, if in 1913, you sat on your savings pile of $1,000,000 for 95 years, it would then be worth only $50,000 in purchasing power (it will have depreciated in value by 95%). One would now need to pay about 20X more than J.P. Morgan for one's bread. Ask my mother how much the price of milk has increased just in the last ten years alone.

In other words, the value of the dollar remained extremely stable for 150 years, the Fed was created in order to "stabilize the value of the dollar," and the result has been a 95% devaluation of the dollar in less than 100 years following its creation. Below is a graph of this history, which I've marked with the year 1913 so you can see the change. The graph is also marked with the years of decoupling from the gold standard, as no examination of dollar value would be sound without such mention.

`(Click pic for a larger image)

While we all take inflation as a "given" - as something that "just happens" in the economy - this belief is utterly incorrect. Inflation, which is the loss of value in your saved dollars, is caused by the Federal Reserve through its management of the money supply. Next time you see Ben Bernanke on the television telling you that they "will take the necessary steps" to help the country, consider their track record so far, and their dismal failure at their stated objective: preserving the value of America's money.

Yet, American's aren't particularly upset about this, and indeed the vast majority have no idea about any of this. I would wager that this is because Americans are educated in Government schools, which barely teach basic accounting, let alone macroeconomic monetary theory. In public school I was forced to memorize the names of every country in Africa, yet there was never a discussion of the nature of money. Half the nations of Africa have been renamed since, but the economic principles which cause such political turmoil remain the same.

The Federal Reserve System is fraudulent. Whatever its stated purpose, its effect is to create a hidden mechanism of deficit spending by politicians, through the insidious invisible taxation of monetary debasement (inflation). With printed money, the Government can buy services for its voters before the effects of inflation are felt. The voters money buys less the following year, as the new money has raised prices, and they are often none the wiser.

Mr. Obama is now mandating that the Fed is to have more oversight, more authority and control over the markets of the United States. If we can learn anything from the Fed, it's that the best way to succeed as a politician is to stretch one's failure over a long enough period that people won't remember it.

The following 7-minute video is one of the best I've ever seen in economics. It begins with Federal Reserve Chair Ben Bernanke threatening an economic crash if Congress audits the Fed, moves to revelaing headlines of financial corporate profits after taxpayers socialized their gambling losses, then closes with Secretary of the Treasury Tim Geithner telling Congress that TARP is really a pertetual line of $700 billion credit for him to do with as he pleases as long as Bernanke agrees. That means, if Treasury can sell the troubled assets, that money returns to Geithner's private reserve to buy more assets. As you may know, Harvard's Elizabeth Warren, the chair for the Oversight Panel, reported to the Senate that Treasury is over-paying corporations by about 50%. That's a gift from us, the taxpayers, to the gambling-addicted plutocrats of $82 BILLION.

What to do about this? Here's Gandhi's take early in his work, in 1903 working for equal rights in South Africa at age 34:

"One thing we have endeavoured to observe most scrupulously, namely, never to depart from the strictest facts and, in dealing with the difficult questions that have arisen during the year, we hope that we have used the utmost moderation possible under the circumstances. Our duty is very simple and plain. We want to serve the community, and in our own humble way to serve the Empire. We believe in the righteousness of the cause, which it is our privilege to espouse. We have an abiding faith in the mercy of the Almighty God, and we have firm faith in the British Constitution. That being so, we should fail in our duty if we wrote anything with a view to hurt. Facts we would always place before our readers, whether they are palatable or not, and it is by placing them constantly before the public in their nakedness that the misunderstanding between the two communities in South Africa can be removed." Indian Opinion (1 October 1903)

I remind you that American colonists petitioned the British government at first, hoping that they would respond by giving Americans equal protection under the law. It was these trials that created the character of our most cherished Americans. It seems that our current choices of action are at least to adhere to the facts, engage in some kind of demonstration/petition/public conversation, and be emotionally and mentally prepared for some form of revolution. I would prefer the easier path that the US government acts in service of the public good rather than an oligarchy. However, at the cost of our collective TRILLIONS of dollars, at the cost of over a million dead and multiple millions in horrific suffering from our imperialistic Wars of Aggression, at the cost of a million children dying every month from preventable poverty and multiple millions more in agony because the US refuses to fund programs like the UN Millennium Goals at more than a token - even programs that generate profit like Microcredit), if we want a brighter future we need a breakthrough beyond what we've done to date.

As always, share this information with whoever considers themselves competent citizens.

Every Rose Has Its Thorn:

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